Global Economics

Why Leadership Teams Must Be Global

The downturn has put globalization in a bad light, but cross-border companies are here to stay. To succeed now, they must be both more local and more global

Global capitalism—and with it, global companies—have dominated the economic discussion in recent years. As more and more enterprises and industries opened up to worldwide competition, it seemed as if the corporate headquarters of the future would be an airborne jumbo jet, constantly circling the planet. With the economic downturn, the debate has changed. The unprecedented international spread of the financial crisis—coupled with rising unemployment, renewed protectionism, increased energy and transportation costs, climate change concerns, and a resurgent labor movement—has put the global economic model to a test. In this new environment, global corporations need to rethink their strategies and organizational structures. While there is little dispute over the efficiency of globe-spanning companies, they are often criticized as faceless institutions that exacerbate local economic problems and have little allegiance to their communities. The financial crisis has brought these issues to the forefront, but it also offers a chance for multinationals to reinvent themselves. Single-Country Management

One of the root problems is a lack of international "bandwidth" in the leadership of multinationals. While many global companies serve every corner of the world, their executive ranks tend to skew toward their headquarters country: Among employees, customers, and other stakeholders around the world, the top brass is typically referred to as "the Americans," "the Germans," or "the Japanese." This ethnocentric management can substantially weaken companies and undermine their long-term global aspirations. Closely knit national groups simply do not have the cultural breadth and outside-in perspective required to keep a company relevant to its customers, employees, and other constituents around the world. The result: second-best "global average" products and services that fail to address local needs, and second-best local executives and employees with subpar performance. This "cost" of serving foreign markets has long been recognized by management experts; the problem is that it keeps rising as the world seems to be drifting apart rather than converging. Recent surveys of preferred employers in the U.S., Europe, and Japan show almost no overlap. There seems to be a strong preference among domestic top talent to join leading local firms. Global firms have largely failed to create relevance and trust for local talent outside their home markets. Expect this trend only to get worse over time with the recent recession and its corresponding mistrust against all things that are global and not homegrown. Make HR Practices Local

To make global corporations more relevant to the local talent pool, a more flexible and decentralized approach to human resources is needed. Clearly, it is the local talent market that dictates salaries and other employment terms, not central HR policies from some faraway head office. And yet these centralizating tendencies in HR do persist: Who has not heard of U.S. corporations overpaying wildly for European executives, or German companies showering their U.S. colleagues with social benefits more typical of their high-tax home base? A more decentralized approach would define the outer boundaries that a corporation wants to maintain in its HR programs, but leave local operations and their executives greater freedom to adjust HR policies within this framework. While, for example, no multinational firm would want to use child labor—and would take appropriate steps to ban that practice worldwide—there's no reason for corporate headquarters to fine-tune local personnel policies such as vacation time or work-at-home rules from thousands of miles away. Another way to improve international connectedness is to improve hiring and promotion to attract a disproportionate number of "bridge people."These are employees who have developed a deep relationship with at least one other country as a result of their family situations, education, or professional histories. Because of their unique backgrounds, bridge people communicate more effectively between cultures and can be of great help to global companies in getting things done across borders. An Upward Path to the Home Office

Nurturing bridge people starts with liberal hiring criteria that willingly embrace unusual backgrounds at the expense of run-of-the mill but well-recognized local bios. To develop and retain those people takes flexibility, because their needs and expectations can be quite different from those of purely local executives. And to create bridge people in-house, companies must remove the glass ceiling that often frustrates cross-border promotions by instead developing and promoting executives on a global basis. The true litmus test is the share of senior-level executives that have joined a corporation at its geographic perimeter and made it to the top of the home office. If that path isn't wide open, why should any self-respecting professional join a foreign multinational rather than seeking employment nearer the center of a national organization? No matter how much effort global companies put into this, the number of effective bridge people will always be limited. The lesson in this is to manage global interfaces sparingly. Instead of trying to coordinate local activities whenever possible, ask instead, "Is this coordination necessary to achieve our broader objectives?" Let local people with knowledge of their quarter deal with local problems whenever possible, and limit global coordination to those issues that provide the highest value. Clearly articulated rules should point out to local operations where central coordination is expected—and for all the rest they should stand on their own feet. Even in a world of near-instantaneous communication, one should never underestimate the benefits of co-location and the richness provided by day-to-day immersion in local issues. Technology has cut down the apparent distance to far-flung operations, but it has not decreased the sheer volume of local issues—and does nothing to resolve potential conflicts among various local preferences. Diverse global leadership teams, supported by diverse international governance structures, are best positioned to enforce a "time-zone democracy," or globally inclusive management that avoids ethnocentric decisions, practices tolerance towards other business environments, nurtures talent on a global scale, and resists the temptation to overcentralize. Such teams have the best shot at demonstrating respect for local norms while at the same time defining objectives and values for the overall corporation that have global relevance.